Save Social Security: Restore Economic Growth

The April release of the 2012 Social Security Trustees Report has occasioned considerable media coverage. Much of this coverage has emphasized the report's finding that the date for Social Security's bankruptcy has been pushed to around 2033 (the 2011 report suggested that bankruptcy would instead occur in 2036). Yet the implications of this report are not confined solely to the matter of public finances, and policy reforms for Social Security are not the only thing that could improve the outlook for this program. Like many federal programs, Social Security is dependent upon the health of the broader U.S. economy; the poor economic performance of the past few years (if not the past decade) has taken a considerable toll on the program. In thinking about managing Social Security, the right should not miss the influence of economic performance upon the sustainability of this federal program.The Trustees Report lays out three scenarios for the future of Social Security: low-cost (where there's less unemployment and higher growth), high-cost (slow growth and high unemployment), and intermediate. The projections Social Security uses are based on the intermediate model. Under this model, after a brief spike in growth, real GDP growth would hover around a little over 2% for the foreseeable future. The combined retirement and disability trust fund would be exhausted in 2033, being able to make 75% of its obligations by that point. By 2086, Social Security would be able to pay for 73% of its promised obligations. However, there are no guarantees that this scenario will come to fruition.

Furthermore, Social Security's finances could be even worse than this report anticipates. The report estimates that unemployment will drop under 8% by 2015 and that real GDP growth will be over 3% a year for a number of years after 2014. This period of anticipated growth would help Social Security's balance sheet. Yet this expectation too may be quite mistaken. After all, the 2009 Social Security report estimated that unemployment would be under 7% in 2012 and that real GDP would be roaring along at an annual growth rate over 4%. Obviously, those things did not come to pass.

And the U.S. economy may be closer to the high-cost scenario than the intermediate one. Under the high-cost scenario, unemployment would hover above 6.5% for the foreseeable future (not even dropping below 7% before 2020). GDP growth would stagnate: after cresting to around 3% annual growth in the late teens, it would sink to just above 1% annual growth. Those numbers are not unimaginable. After all, from 2005 to 2010, average annual GDP growth was just 0.7%. Even the period of growth from 2000 to 2007 saw only a 2.4% average real GDP growth, the worst business cycle for growth since the Great Depression.

If the current economy were indefinitely extended, the U.S. could easily see itself falling into the high-cost model. Under this model, Social Security crashes fast. By 2027 (fifteen years from now), the trust fund would be depleted. At that point, Social Security would be able to meet only 70% of promised benefits. By 2086, it would only be able to pay 52% of promised benefits. The slow growth of the present would make Social Security a zombie program, one with a shadow of vitality.

But economic growth could significantly change this picture. Under the low-cost scenario, the future of Social Security is much brighter. The retirement trust fund would probably be depleted by around 2054, but the whole Social Security trust (combining retirement and disability funds) would never be depleted. Moreover, even in 2054, the retirement fund alone could still pay out 91% of promised benefits. By 2086, it could pay out 99% of promised benefits. The trust fund as a whole could pay 100% of benefits indefinitely. Under something approaching the low-cost scenario, the policy tweaks needed to make Social Security indefinitely sustainable are much more modest.

The low-cost scenario might be a bit of an actuarial ideal. The employment picture suggested by this model might be hard to arrive at; no decade in memory has averaged the 4.5% unemployment rate the scenario projects indefinitely into the future. But the real GDP growth rate of this scenario is very achievable. After a period of strong GDP growth (over 4% a year until 2017 or so), the economy's growth would settle to a little under 3% annually (between 2.7% and 2.9%). Until 2000, every decade in the postwar era has seen at least a 3% average annual growth rate. The fact that the post-2000 economy has been such an anomaly only strengthens the urgency for serious reforms in economic policy; only two years of George W. Bush's presidency saw a real GDP growth above 3%. For only one year in Obama's presidency has GDP growth reached 3%.

Yet even if the low-cost scenario might not be totally realized, strong economic growth will make any Social Security reforms much less painful and give far more room for regulatory reform. Moreover, bolstering the incomes of the middle class could also go a long way toward restoring Social Security's long-term solvency and the nation's economic vigor.

In order to be sustainable, modern Social Security depends upon solid growth. Without a healthy economy in the long term, it seems hard for the nation to maintain Social Security. Any "entitlements crisis" is intimately connected to the economy, and our present economic stagnation would seem to make an entitlements crisis unavoidable. The high-cost scenario for Social Security shows its finances jumping off a cliff. Healthy (and attainable) economic growth, however, can lead to a much more sustainable Social Security model.

This dynamic has electoral implications. In the Republican primary, Mitt Romney gained ground by pledging to defend Social Security. This defense could play even better in the general election: it offers the opportunity of combining market-oriented growth with income security. Romney can simply say that, if we want what Social Security has become, we can no longer afford the economic disappointments of the past decade. To those Americans concerned about the future of Social Security, Romney can argue that economic growth is perhaps the best shield that program can have. Obama may try to cast Republicans as cutting away at the social safety net, but the president's own record has been de facto snipping away at this net; without a healthy economy, that net, sooner or later, will provide little more cushion than thin air.

The April release of the 2012 Social Security Trustees Report has occasioned considerable media coverage. Much of this coverage has emphasized the report's finding that the date for Social Security's bankruptcy has been pushed to around 2033 (the 2011 report suggested that bankruptcy would instead occur in 2036). Yet the implications of this report are not confined solely to the matter of public finances, and policy reforms for Social Security are not the only thing that could improve the outlook for this program. Like many federal programs, Social Security is dependent upon the health of the broader U.S. economy; the poor economic performance of the past few years (if not the past decade) has taken a considerable toll on the program. In thinking about managing Social Security, the right should not miss the influence of economic performance upon the sustainability of this federal program.

The Trustees Report lays out three scenarios for the future of Social Security: low-cost (where there's less unemployment and higher growth), high-cost (slow growth and high unemployment), and intermediate. The projections Social Security uses are based on the intermediate model. Under this model, after a brief spike in growth, real GDP growth would hover around a little over 2% for the foreseeable future. The combined retirement and disability trust fund would be exhausted in 2033, being able to make 75% of its obligations by that point. By 2086, Social Security would be able to pay for 73% of its promised obligations. However, there are no guarantees that this scenario will come to fruition.

Furthermore, Social Security's finances could be even worse than this report anticipates. The report estimates that unemployment will drop under 8% by 2015 and that real GDP growth will be over 3% a year for a number of years after 2014. This period of anticipated growth would help Social Security's balance sheet. Yet this expectation too may be quite mistaken. After all, the 2009 Social Security report estimated that unemployment would be under 7% in 2012 and that real GDP would be roaring along at an annual growth rate over 4%. Obviously, those things did not come to pass.

And the U.S. economy may be closer to the high-cost scenario than the intermediate one. Under the high-cost scenario, unemployment would hover above 6.5% for the foreseeable future (not even dropping below 7% before 2020). GDP growth would stagnate: after cresting to around 3% annual growth in the late teens, it would sink to just above 1% annual growth. Those numbers are not unimaginable. After all, from 2005 to 2010, average annual GDP growth was just 0.7%. Even the period of growth from 2000 to 2007 saw only a 2.4% average real GDP growth, the worst business cycle for growth since the Great Depression.

If the current economy were indefinitely extended, the U.S. could easily see itself falling into the high-cost model. Under this model, Social Security crashes fast. By 2027 (fifteen years from now), the trust fund would be depleted. At that point, Social Security would be able to meet only 70% of promised benefits. By 2086, it would only be able to pay 52% of promised benefits. The slow growth of the present would make Social Security a zombie program, one with a shadow of vitality.

But economic growth could significantly change this picture. Under the low-cost scenario, the future of Social Security is much brighter. The retirement trust fund would probably be depleted by around 2054, but the whole Social Security trust (combining retirement and disability funds) would never be depleted. Moreover, even in 2054, the retirement fund alone could still pay out 91% of promised benefits. By 2086, it could pay out 99% of promised benefits. The trust fund as a whole could pay 100% of benefits indefinitely. Under something approaching the low-cost scenario, the policy tweaks needed to make Social Security indefinitely sustainable are much more modest.

The low-cost scenario might be a bit of an actuarial ideal. The employment picture suggested by this model might be hard to arrive at; no decade in memory has averaged the 4.5% unemployment rate the scenario projects indefinitely into the future. But the real GDP growth rate of this scenario is very achievable. After a period of strong GDP growth (over 4% a year until 2017 or so), the economy's growth would settle to a little under 3% annually (between 2.7% and 2.9%). Until 2000, every decade in the postwar era has seen at least a 3% average annual growth rate. The fact that the post-2000 economy has been such an anomaly only strengthens the urgency for serious reforms in economic policy; only two years of George W. Bush's presidency saw a real GDP growth above 3%. For only one year in Obama's presidency has GDP growth reached 3%.

Yet even if the low-cost scenario might not be totally realized, strong economic growth will make any Social Security reforms much less painful and give far more room for regulatory reform. Moreover, bolstering the incomes of the middle class could also go a long way toward restoring Social Security's long-term solvency and the nation's economic vigor.

In order to be sustainable, modern Social Security depends upon solid growth. Without a healthy economy in the long term, it seems hard for the nation to maintain Social Security. Any "entitlements crisis" is intimately connected to the economy, and our present economic stagnation would seem to make an entitlements crisis unavoidable. The high-cost scenario for Social Security shows its finances jumping off a cliff. Healthy (and attainable) economic growth, however, can lead to a much more sustainable Social Security model.

This dynamic has electoral implications. In the Republican primary, Mitt Romney gained ground by pledging to defend Social Security. This defense could play even better in the general election: it offers the opportunity of combining market-oriented growth with income security. Romney can simply say that, if we want what Social Security has become, we can no longer afford the economic disappointments of the past decade. To those Americans concerned about the future of Social Security, Romney can argue that economic growth is perhaps the best shield that program can have. Obama may try to cast Republicans as cutting away at the social safety net, but the president's own record has been de facto snipping away at this net; without a healthy economy, that net, sooner or later, will provide little more cushion than thin air.